Inventory destocking is a major theme on chemical company Q4 earnings conference calls. While the bulk of the destocking may be behind us, the continuing process is likely to hit profits in Q1 and potentially beyond.

Destocking was clearly widespread late last year as crude oil prices plunged 40% through Q4 2018 – rather than a sharp, quick move, it was more of a steady and relentless decline.

In a falling crude oil price environment, buyers of chemicals and plastics tend to wait on the sidelines in anticipation of lower prices, instead drawing down their inventories. This “buyers’ strike”, which was increasingly pronounced towards the end of December, led to big year-on-year profit declines.

“The US/China trade war and the slump in oil prices have led to a particularly sharp destock cycle, which we expect to turn positive after the Chinese New Year, even before there is any resolution of the US-China disputes,” said Laurence Alexander, chemicals analyst at Jefferies & Co.

Along with DowDuPont and LyondellBasell, Eastman Chemical also cited customer destocking – and “beyond normal seasonality” in disappointing Q4 results. The trend impacted multiple segments.

As oil prices plunged again towards the end of December, the export markets were “pretty quiet” in the last two weeks of the month, leading to a build-up in US polyethylene (PE) inventories, noted Jim Fitterling, CEO-Elect of Dow. Fitterling maintained it was “mostly sentiment at the end of the year that drove that build-up in inventory” and that coming out of Chinese New Year, there should be “a pull on the demand side that will start to rebuild those volumes and margins”.

However, the destocking trend is clearly not over, with DowDuPont CEO Ed Breen expecting this to correct itself in the next few months, with markets returning to normal by the second half.

For Q1 2019, DowDuPont expects overall sales to be down by mid-single digits percent year on year, with earnings before interest, tax, depreciation and amortisation (EBITDA) declining in the low-teens percent.

The downturn is expected be much more pronounced on the Dow side (Materials Science), with sales down by high-single digits percent, and EBITDA off by the low-20s percent. Margin compression is expected in PE as well as polyurethanes (PU).

LyondellBasell did not offer specific Q1 numbers guidance but CEO Bob Patel sounded more sanguine on the outlook as he believes much of the destocking has already happened. After the pause in PE buying activity amid destocking in Q4 2018 prompted by a 40% plunge in crude oil prices, the market is normalising, according to the CEO.

“What we hear from our customers is that [the] seasonal uptick in demand should be expected. And… because of the destocking that occurred with the reducing oil price… we think downstream inventories are quite lean,” said Patel.

The downswing in global PE markets is attributed to three key factors – the surge in capacity and exports from the US, the destocking trend prompted by the severe downturn in crude oil in Q4 (which has since reversed) and weakness in China and Europe.


Global manufacturing Purchasing Managers’ Indexes (PMIs) continue to show profound weakness in China and Europe. The Caixin China General Manufacturing PMI fell further into contraction territory with the figure coming in at 48.3 for January versus 49.7 in December, the lowest reading since February 2016. The 50 level delineates expansion/contraction in manufacturing activity.


Europe continues to lose momentum. The IHS Markit Eurozone Manufacturing PMI fell in January to 50.5 versus 51.4 in December, the lowest since November 2014. Europe is dealing with the uncertainty of Brexit, Italy slipping into recession and France’s economy being hit by the ongoing “yellow vest” protests.

The US remains the lone bright spot among the major economies, with the US ISM Manufacturing PMI rebounding to 56.6 in January versus 54.3 in December. While US economic resilience supported by a policy shift from the Federal Reserve, and the recent upswing in crude oil prices are positive forces, deteriorating conditions in China and Europe make for a challenging macro environment for chemicals in 2019.